Wednesday, July 30, 2008

The Investment Zoo Chapter 6: The Investment Business: caveat emptor!

Jarislowsky warns investors to be aware that fees in the investment world take a heavy bite out of any after inflation gains of investments. In addition, the incentives that brokers have to get clients in and out of trades creates wealth for the brokers but the transaction fees destroy wealth for the investors. There are many "costs" that get passed along to the investor, and for that reason, every investor should know how their investment dealer, broker or other gets compensated so that they can better understand why certain investments are being recommended and temper their decisions accordingly.

He points out that paying a difference between .5% or 1% of asset fees and assuming a 5-6% real long term rate of return for stocks will make a 10% difference to the net worth of the investments over 10 to 20 years. Therefore, he counsels that even a .25% difference in annual investment expense is significant and investors need to minimize these costs.

Jarislowsky advises mutual fund investors to seek out low cost funds but also to invest in funds where the decisions are based on sound long term policies and good research. Don't sell just because a good fund had a bad year, as even the best funds experience that. Be careful if analysts and fund managers get large short term performance bonuses because it might cause them to take actions which will not be long term rewarding for investors.